Sarah McGuiness would not strike many people as a shirker or a scrounger. The divorced 40-year-old nurse, who suffers from multiple sclerosis, has two children, aged four and nine, whom she feeds and houses using her £15,000-a-year salary and the £1,000 she receives through working tax credit, child tax credit and child benefit. She doesn't drink or smoke. "I don't have any kind of extravagance," she insists, unless you count the £400 a year she pays to someone to look after her children while she works.

But McGuiness is in the government's firing line. One in three pounds spent on benefits, screamed the Daily Mail last week, with some prodding from figures provided by Tory chairman Grant Shapps. The chancellor is acting out of fairness, the government and the Daily Telegraph insist, by capping the rise in benefits at 1% a year for the next three years in a crackdown on those living off the state.

The capped rise is below the 2.2% rate of inflation, but as George Osborne said during his autumn statement this is all about "being fair to the person who leaves home every morning to go out to work and sees their neighbour still asleep, living a life on benefits".

But campaigners say it is increasingly unclear that this is really what the uprating bill does – even if it were a desirable crackdown when the government is finding £3bn a year to cut the highest rate of tax from 50p to 45p for those earning more than £150,000.

The Resolution Foundation has already shown that 60% of the spending cut associated with the 1% uprating cap will fall on working households by cutting the amount they could have expected in tax credits and child benefit payments.

Today, an analysis by the Children's Society puts flesh on the bones of that stark figure. The "shirkers" and "scroungers" who will lose out in the name of fairness, they say, are estimated to be up to 40,000 soldiers, 300,000 nurses, 150,000 nursery and primary school teachers, 510,000 cashiers, 44,000 electricians and 1.14 million secretaries and administration assistants.

McGuiness, who lives in Sutton, south London, will lose £424 a year by 2015. She says she will have to respond by cutting the children's swimming lessons and her son's cello classes, and stopping her payments towards her former husband's life insurance policy, which was bought to give some security for the children. Another couple in the firing line, Tim, 41, and Karen O'Brien, 56, who earn £500 a week from their IT consultancy business in Gosport, Hampshire, would lose £296 per year by 2015. That would mean the couple, who have been seeking advice from their local Citizens Advice Bureau in recent months, addressing how much and what they eat. It is as stark as that. "A loss of almost £300 per year will definitely put us in the red, so we would need to cut something," Karen says. "My husband is a diabetic so the food he has to eat is more expensive already. My son is a growing boy. His school dinner costs £3 so I make a packed lunch. I can't not feed him.

"The one saving we could make is that I don't eat a few days a week. It sounds extreme but we already walk everywhere. My son now wears adult clothes so that is an added cost as well. I don't know how they expect us to survive. I would love to see some of them live on the money we get."

It is this type of testimony, tinged with no little bitterness, that leads shadow work and pensions secretary Liam Byrne, interviewed on Friday in his office on the top floor of the Palace of Westminster's Portcullis House, to believe Osborne has shot himself in the foot.

It sets up a significant moment on Tuesday when the bill is debated and voted upon in the Commons.

Byrne, using language that would be ruled unparliamentary when he faces the coalition's work and pensions secretary in the debate, is adamant: "Iain Duncan Smith is going to come to the House of Commons this week and say this bill is all about punishing Britain's shirkers and scroungers. That is a big lie. This is about an attack on Britain's working families."

Labour's decision to oppose Osborne's decision to increase benefits below the rate at which prices are expected to rise has been deemed politically dangerous by many. Byrne in particular is known to be averse to any policy position that could be construed as spendthrift. He is personally still blighted by a joke memo he left on the desk of his successor as chief secretary of the treasury, David Laws, after Labour lost the election ("I'm afraid to tell you there's no money left – Good luck!") which tapped a nerve among those who felt that Labour had been profligate in its spending. Some Westminster watchers have claimed that Osborne was delighted by Labour's decision to vote against the government's crackdown, believing he had set a trap into which Labour leader Ed Miliband had naively walked. One newspaper claimed last week that Byrne, troubled by this political nightmare, had convened a meeting this month to "find ways to extricate Labour from the hole it has so gleefully buried itself in". Byrne is pretty adamant that isn't the case: "That sounds pure bollocks."

So is Osborne rubbing his hands? "I don't know." Byrne says. "He is so machiavellian it is hard to tell but I think he has made a political error.

"If you look at blue-collar voters, they are not in favour of cutting tax credits. All the polling I have seen shows that once you explain how this uprating bill slashes tax credits once again, support evaporates — and, crucially, it will hurt the Tories in blue-collar seats they need to win.

"If you think about Cannock Chase, Nuneaton, all the seats around Manchester, there is a swathe of seats where blue-collar voters who deserted Labour at the last election and are now returning to us, but the Tories need their support. Once people feel this new assault on their tax credits, they will not be in much mood to vote Tory.

"So I think Osborne, in search for a welfare dividing line, has shot himself in the foot — and he has cost the careers of lots of his colleagues."

Byrne says the decision to vote against the government on this issue made sense within the opposition's political strategy to appeal to those who pay in during the good times and expect help, "a ladder", when they need it. The idea is that social security under a Labour government would be based around the contributory principle – those who pay in will get something out of the state when they need it.

"We think there are two groups feeling the squeeze hardest," he says. "One is working families who have the costs of childcare, but the second group is people in their fifties who have paid an awful lot in over the course of their lives; they may now be out of work, have just lost their jobs, and there is very little to get them back to work.

"Half of people unemployed in their fifties will have been unemployed for over a year. The government shut down the new deal for the over-fifties – there is now very little help them. Those are two groups that need to get more for what they put in."

This leaves an obvious question about what to do about those who do not contribute to the state. Byrne says that in the unlikely event that an amendment was laid down to the uprating bill so that only people out of work had their benefit rise capped, Labour would not support it. "I don't think we should be protecting one group and let another group swing in the wind," he says.

But on Friday morning Labour did want to show that it has a tough edge for those not pulling their weight. Byrne and shadow chancellor Ed Balls visited Newham, east London to launch their Jobs Guarantee policy, under which every adult aged over 25 and out of work for more than two years would be obliged to take up a government-sourced job for six months or lose benefits.

The jobs, provided by businesses but subsidised by the state, would be national minimum wage, Byrne says, not living wage. But this toughness is not out of place within the Labour tradition, he insists, citing in the first instance proposals by socialist Beatrice Webb at the turn of the last century and rhetoric from another great Labour figure from the past.

"If you go to back to the Webb report, they were proposing detention colonies for people refusing to take work. If you go back to Herbert Morrison in 1946, at Labour party conference he talked about the empty mouths we couldn't afford to feed.

"All the way through our history there has been an insistence on the responsibility to work if you can. Labour shouldn't be any different now. We have always been the part of the right to work, but we have always been the party of the responsibilty to work as well."

So does Byrne agree with Osborne that there are people hiding behind their blinds as their next-door neighbour troops off to work? "You will always find these cases. Talk to any Labour MP who knocks on a lot of doors, they will tell you they hear these stories.

"But in today's 24-hour society it is as likely that the person with their blind down has just done a night shift, quite frankly.

"You will hear these stories and there has always been this determination in this country for people to pay in for what they get out. But the way Osborne is layering on this rhetoric is beginning to wear thin now.

"I think it is divisive and I think right now people are getting a bit sick and tired of the language of division. People feel under tremendous pressure today – they want to close ranks, pull together, and they don't like the language of division."